Saturday, July 15, 2017

The cyclicality of share buy-backs: Costco edition

Currently looking through Costco - one of the finest companies I know. (We do not own a stake...)

Anyway this is hardly a Costco specific comment - but here is a run of their buy-backs (after issuance/option exercise etc). Negative numbers are net repurchases.

Year Ended
Cash from stock issuance
 2,016 -412
 2,015 -395
 2,014 -212
 2,013 77
 2,012 -459
 2,011 -355
 2,010 -348
 2,009 2
 2,008 -548
 2,007 -1644
 2,006 -1039
 2,005 -135

The company - as you can see - has bought back a lot of stock. The lack of a buyback in 2013 followed a purchase of a non-controlling stake in Costco Mexico.

But whatever - the company stopped repurchasing stock at the bottom of the market in 2009 - only to start again in earnest as the market and their stock price went up.

This happens in almost only cases - and in this case I do not think the board is mendacious in manipulating their stock. It just happens.

And it even happened with Charlie Munger (who is more than passingly rational) on the board.

Just saying.



Anonymous said...

So if you saw management starting buybacks during something like the 2008/9 downturn - would you see that as a positive indicator?

Anonymous said...

I think you accidentally only a whole word there

Arthur Dent said...

I suspect it's more meaningful to look at *net* buybacks. Your table shows 10 years of negative cash issuance for COST. But when I look at the shares outstanding, there have only been 6 years when the count actually moved down. i.e. I don't think it's a positive metric if a company buys in a ton of stock, then passes a ton and a half out free to their execs. Not to say this is what COST did, but you get the point.


Bill Martin

Anonymous said...

Everyone says this,

But think about it - you are running a business as CEO (eg. costco)

And a recession hits. And your topline and bottom line drops. And for another quarter and another quarter, and then again. (I don't know if costco was effected in this year but 90% of businesses would be)...So you have to act prudently from a cash perspective as you don't know how long a downturn would last. hell, if you were japan ceo in late 90s, buying back stock would have been pretty dumb.
Given that a buyback is the same as a dividend, and you need your excess cash to survive a depression or recession, it's stupid to pay out a dividend or buyback stock for shareholders.

What you are doing is with hindsight bias, it's easy to say they should be buyback stock, but in reality, that's ridiculous.

Not to mention in most businesses which have creditors (long term debt), they have provisions that say you can't buy back stock unless certain ratios are met. So even if you may want to, bylaws say you can't

Anonymous said...

Are they large stock-option issuers to their staff? So that the "buy-back" is simply share-dilution prevention? (this is historical complaint about Cisco..)

Unknown said...

If you consider stock purchases as 'excess cash' after investment opportunities in Costco's operating market have been exhausted, pro-cyclical stock purchases could still be the result of a contra-cyclical capital allocation.

Oulixeus said...

I think the pattern is a result of the fact that when the share price is most depressed (i.e. during the crisis), the company feels that they can't afford to use cash/raise debt to financing a repurchase. Conversely, when the market rises and times are better, the company feels that hey have more capacity to repurchase shares. It seems counter intuitive; you would think companies should repurchase their shares when the shares are at their "cheapest," but boards/management just don't want to take the risk. This is something we pointed out to management frequently when I was an analyst, but no one seemed to agree.

Anonymous said...

Specious reasoning. You would see the same general pattern (with less volatility) if you put up a chart of dividends vs year, or most cash flow metrics, etc. Buy backs, divs, etc. are correlated to EPS (or whatever cash flow measure you prefer). Companies can't buy back stock without cash, and they happen to have the most cash within a cycle at the peak of that cycle.

The Shadow Banker said...

Hi John - not exactly sure what your point is from this post, but if it's to show the poor-timing and sloppy buying of corporate stock repurchases of even a well-regarded company, I think you're falling into the trap/smokescreen of the real reason for stock repos in the 21st century.

They have nothing to do with the shareholder and enhancing shareholder value, and everything to do with self-remuneration via offsetting ESOP and outright share grants.

Though you laboriously went thru the work of trying to net these out, my experience w/ corporate proxies indicates that the options are priced waaay too low. In addition, anecdotally I have heard and seen numerous instances where the old practice of backdating stock/option pricing seems to be more prevalent than ever.

Which is a real shame, because in the right hands stock repurchases could be manna from heaven:

Anonymous said...

Given that there is little financing or short-term liquidity available in 2009, it would be rational for Costco to hoard its balance sheet cash or credit lines in 2009.

The low cost of debt available to Costco in recent years would have (i) lifted Costco's shares via low discount rate and (ii) provided liquidity for share buybacks. You could argue that company boards like to buy high and sell low; or maybe valuation and buybacks are correlated factors both driven by low cost of debt.

Anonymous said...

Should add a new column, showing share price range for each year.

Jake said...

Would this sound as weird if you replace buybacks with dividends? Of course companies return more capital when they have excess capital.

Anonymous said...

would you buy it?

Umbriferum said...

Why isn't this perfectly rational? In 2009, you were better off keeping liquidity since you weren't sure if your business would collapse in the coming months. Hindsight is always 20/20 and they were prudent enough to start buying in large amounts almost immediately after.

UplayOnline said...

Not to say this is what COST did, but you get the point.


General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.